Advantages and Disadvantages of Buying a Home in the Preconstruction Phase
When buying a home at the preconstruction phase, you might enjoy the following:
- being the first to personalize it by choosing some of the finishings and upgrades in the home;
- being the first to live in the home – it will be a clean and undamaged space; and
- having a modern home with all new appliances and mechanical equipment (heating, etc.).
When you buy a home in the preconstruction phase, there are usually years between the date that you sign the Agreement of Purchase and Sale and the Closing Date. Anything can happen during this period of time, and because it is a lengthy period of time, there are inherent risks.
When you sign the Agreement of Purchase and Sale, you agree upon the purchase price at that point. If there are two to four years between the date that you sign and the date that you close, then there is a risk that you have not predicted the market accurately. In other words, you won’t know if your property will be worth the price that you are going to pay for it at the time of closing. Furthermore, the builder has already accounted for some of the market appreciation over the years, and they are building that market appreciation into their asking price. If home market values increase greater than anticipated, then you will be lucky. If they slow down or even drop in that time period, then you will be unlucky. Your purchase price does not change based on the changes in market values over the years.
Another market risk lies in the costs of construction. Construction levies (or development levies or charges) are built into the Agreement of Purchase and Sale. These are extra costs that the developer can charge the buyer at closing, if construction costs have gone up more than they anticipated at the time of signing the Agreement of Purchase and Sale. Sometimes these are “capped” so that the buyer knows what the maximum levy would be.
How you view these market risks may depend on your long-term strategy for this particular investment. Are you planning to try to make quick money by assigning the contract or selling the property right before or after the Closing Date? Then your strategy may be high risk, because you are depending on a strong market to bring the market value up in a short period of time. If you plan to keep your investment for a long period of time, then risk may be low, because in the long run, Greater Toronto Area real estate is most likely to gain value.
Builders rarely complete construction according to their estimated timeline. Their anticipated Closing Date in the Agreement of Purchase and Sale is an estimate. Construction involves many variables and delays are inevitable. Often the weather conditions will cause delays; the builder can take a guess at how many days they won’t be working due to high winds and extreme temperatures, but it will only be an estimate and in any given year there could be additional down time. Also, builders rely on many third parties to get what they need, such as permits and supplies, and builders do not have control over the wait times for these items, and can only estimate these times. The Agreement of Purchase and Sale sets out the builder’s rights and responsibilities with respect to extending their deadlines and the notice that they must provide to the buyer.
Waiting for the home to be built and experiencing delays to the expected completion date can be disappointing. If you need the home to be ready by a strict deadline, then buying in the preconstruction phase might not be right for you. If you are prepared for the delays and have flexibility on your Closing Date, then you will likely do just fine with this type of purchase.
If the property is not completed to the standards that you expected, then there could be some additional work imposed upon you, to complete the appropriate forms with Tarion and to hold the builder accountable. It’s possible for an owner to take possession of a unit and to still have workers requiring access to the property from time-to-time to complete unfinished work or to fix any deficiencies.
If you have bought a home with a yard, then you might experience a delay with receiving grass and fencing, if the builder needs to wait for warmer weather in order to install those.
Buying a home in the preconstruction phase can involve stress due to not knowing everything that is happening or when it will be completed, and this can go on for what feels like long periods of time. It’s always a good idea to speak with someone else who has already been through this process, and hear about how they coped at every stage.
After you get through the years of anticipation and the final touches have been put on the home by the builder, then you will be left with a brand new home to finally enjoy as your own.